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New banking rules could shake up credit, debit reward card programs

Revisions to banking rules in the works could shift power from banks to retailers, which may mean big changes in the shopping experience -- and the attractiveness of some reward cards.

Credit cards that reward shoppers with frequent flier miles, cash or other incentives are loved by consumers, but they rankle merchants, who have long complained about the rules and fees banks impose on debit and credit card purchases.

The battle over credit and debit cards has huge implications for large Minnesota employers like Best Buy, Target and US Bank. None of them provided comment for this story. But the implications extend to small operations too, like the "R" Skyway Store in St. Paul, where it's cash and checks only.

Nancy Leitch and her husband, Michael, don't take credit or debit cards at their convenience store and deli. They say each card swipe costs too much.

"The last I checked the best deal I had was 14 cents and then like 4 cents per hundred or 4 percent," Nancy Leitch said.

Nancy Leitch figures she'd have to raise her prices by five percent to offset the cost of taking plastic.

Most merchants, of course, do accept credit and debit cards. But they complain they fork over tens of billions of dollars to banks every year in fees.

"These fees are very onerous," said Brian Steinhoff, president of the Minnesota Retailers Association. "And you have to use these cards. You have to pretty much accept them if you're a retailer."

He said the fees, like other costs of business, essentially gets put back on the customer in higher prices.

But potential revisions in the rules governing credit and debit cards could change that.

First, there's a pending legal settlement the U.S. Department of Justice has reached with Visa and MasterCard. If approved, merchants could offer discounts for paying with cash or cards that are less costly to accept.

Then there's the Federal Reserve Board's proposal to slash debit card fees to a maximum of 12 cents per transaction.

Banks aren't happy with the debit fee cuts.

"Government interference in business, especially between two businesses, as in this case, is not appropriate," said Nessa Feddis, a lobbyist for the American Bankers Association.

"History has shown that government price-fixing means consumers pay more and they get less. And we think that's what is going to happen here," Feddis said.

Many bankers say the fee cuts will line the merchants' pockets, and consumers won't benefit. Retailers counter that competition will force them to share savings with customers.

Brian Dodge, a spokesman for the Retail Industry Leaders Association, a trade group for the nation's biggest retailers, said that for years credit card agreements effectively barred merchants from steering customers toward the cheapest form of payment, which is usually cash. People using a high-fee credit card at the register have paid the same price as someone using cash.

"The great unfairness [in the current method] is that people who purchase their products with cash are subsidizing credit card rewards programs," he said.

Dodge says that a merchant might pay a fee of up to 3 percent to 4 percent for accepting a reward card.

"If the debit card fee reduction sticks, you can expect to see merchants attempt to find ways to encourage their consumers to use lower-cost forms of payment whether that's debit or cash," he said.

So does that mean the end of reward cards that give folks frequent flier miles and other perks?

David Robertson, publisher of the Nilson Report, which tracks the payment card industry said he thinks reward debit cards are toast, but not reward credit cards.

"The credit card companies are fighting to retain those customers and credit card rewards are how they're going to do it," Robertson said. "I think the reality is that a merchant would be really foolish to tell me I can't pay with the card I want to pay with."

The big question is whether merchants might actually dare to offer discounts for cash and effectively punish reward card users for paying with high-fee plastic. That might be more fair, economically, but alienating those cardholders could be even more costly for retailers than the fees they hate.